What Is an In Specie Distribution and How Is It Taxed?

An in specie distribution is the transfer of an asset in its current form, rather than selling the asset and distributing the cash proceeds. The term is Latin for “in its actual form,” and this method can involve assets like stocks, bonds, or property. For example, instead of selling a collection of stocks and giving an heir the cash, an in specie distribution would involve transferring the ownership of the actual stocks to the heir. A company that is rich in assets but low on cash might also use this method to pay dividends to its shareholders.

Tax Consequences of In Specie Distributions

The tax implications of an in specie distribution depend on the type of account from which the asset is being transferred. For a standard, taxable brokerage account, the act of transferring the asset is not a taxable event. The recipient of the asset also inherits its original cost basis and its original holding period, which means that any tax liability is deferred until the recipient decides to sell the asset.

When an asset is distributed from a tax-deferred account, such as a traditional 401(k) or IRA, the rules change. The distribution is considered a taxable event at the time of the transfer. The fair market value of the asset on the date of the distribution is treated as ordinary income to the recipient for that tax year, and the recipient’s new cost basis in the asset becomes that fair market value.

A specific tax rule, known as Net Unrealized Appreciation (NUA), applies to distributions of employer stock from a qualified retirement plan. Under NUA, the tax treatment is split. The cost basis of the employer stock is taxed as ordinary income at the time of the distribution, but the appreciation is not taxed until the stock is sold, at which point it is taxed at more favorable long-term capital gains rates.

In Specie Distributions from Retirement Accounts

In specie distributions are a common practice for managing retirement accounts, particularly for satisfying Required Minimum Distributions (RMDs). An individual with a Traditional IRA can meet their annual RMD obligation by transferring securities directly out of the account, and the fair market value of the securities on the day of the transfer is used to calculate the amount of the RMD satisfied.

The Net Unrealized Appreciation strategy is a significant reason for using in specie distributions from 401(k) plans that hold employer stock. To qualify for NUA tax treatment, the distribution must be a lump-sum distribution, meaning the entire account balance is distributed within one calendar year. This distribution must also follow a triggering event, such as separation from service, reaching age 59½, or death.

Distributions from Roth IRAs follow a different set of rules. Since qualified distributions from a Roth IRA are entirely tax-free, an in specie distribution from a Roth account is also not a taxable event. This assumes the standard Roth distribution rules are met.

Executing an In Specie Transfer

To initiate an in specie transfer, contact the financial institution that holds the assets, such as the brokerage firm or the 401(k) plan administrator. The institution will provide the necessary paperwork to authorize the transfer, which typically involves completing a “Distribution Request Form” or a “Letter of Authorization.”

You will need to provide details for both the sending and receiving accounts, including account numbers. You must also identify the specific assets to be transferred by their ticker symbol for stocks or CUSIP number for bonds, and specify the number of shares to be moved.

Once the forms are accurately completed, they must be submitted to the financial institution, which can be done online, by mail, or in person. The processing time for an in specie transfer ranges from three to ten business days. Upon completion, you will receive a transaction confirmation, and the transferred assets will appear in the designated receiving account.